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Market Update: Despite Scary Stories, Stocks Show Strength

October 27, 2022

Download the 10.28.22 Dynamic Market Update for advisors’ use with clients

By Kostya Etus, CFA®, Head of Strategy, Dynamic Investment Management

Market Update

Happy Halloween! There are many scary movies that come out around this time of year, but some of the scariest stories are in the financial media. Recession looming, high inflation, inverted yield curve, rate hikes and many other fear mongering phrases continue to be highlighted in the press. However, it’s important to remember that just like in the movies, the media loves a good scary story.

The stock market has actually been rebounding since about mid-October—despite the headlines. The primary drivers for this growth have been:

  1. Corporate earnings: Results have generally been favorable (meeting or beating expectations); approximately 20% of S&P 500 companies have reported third quarter earnings with about 73% exceeding earnings forecasts.
  2. Oversold conditions: Investor sentiment had reached excessively pessimistic levels in early October—the lowest since 2008, according to the AAII bull-bear sentiment indicator. This tends to be a contrarian indicator and often sets up the market for a bounce.
  3. Hints of Fed slowdown: Some Federal Reserve officials have begun to signal a desire to slow down, or even stop, the raising of interest rates early next year.

Is this a short-term reversal or have we seen the market hit bottom?

The last component mentioned above is perhaps the most important indication to help identify a potential market bottom. When inflation begins to drop and the Fed jointly reaffirms a desire to stop the rate hikes are when we’ll most likely see a more prolonged market rebound. Unfortunately, only time (well, and the Fed), will tell.

If history is any guide, trying to determine when the market will bottom, or peak for that matter, has a low probability of success. Timing the market is nearly impossible, and one of the reasons is because some of the best days of the market happen right around some of the worst. A few key observations from the chart below, “The Best and Worst Trading Days Happen Close Together”:

  1. Most the best days cluster around the worst days.
  2. About half of the best days happen in years with negative returns (and many during a bear market or recession).
  3. You cannot avoid the bad days and only participate in the good; the best chance of success is to remain invested in the market, even during periods of high volatility.

Source: Vanguard calculations using data from Refinitiv as of December 31, 2021. Past performance information is given for illustrative purposes only and should not be relied upon as past performance is not an indication of future performance.

As always, Dynamic recommends staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.

Should you need help navigating client concerns, don’t hesitate to reach out to Dynamic’s Investment Management team at (877) 257-3840, ext. 4 or investmentmanagement@dynamicadvisorsolutions.com.

Disclosures

This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.

This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.

All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.

Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.

Photo: Colton Sturgeon, Unsplash